Americans can easily see the effects record inflation every time I shop. Prices have gone up, from groceries to gas pumps. Although inflation has cooled, families are still feeling the pinch.

And the bad doesn’t end there: inflation is also on the rise stock markets appear stronger than they really are and reducing returns for everyone, including those with retirement accounts.

We rarely hear about this last point. When media outlets discuss the latest inflation rate, they usually highlight the average annual percentage change in the consumer price index. CPI tracks a basket full of goods, incl housingfood, energy, insurance and more, measuring the average price increases of these items over time.

From 2016 to 2020, the inflation rate averaged 1.9%, resulting in a cumulative price increase of about 7.7% over four years. The Federal ReserveHis target rate — about 2 percent — usually goes unnoticed by consumers because wages tend to rise at a similar rate.

But from 2021 to the present, the inflation rate has averaged 4.9%, leading to a cumulative price increase of 19.6%. At these high levels, wages struggle to keep up, making inflation more visible to consumers. A recent poll found that 63 percent of voters say they think so the US economyy is on the wrong track and 62% characterize it as weak.

However, despite this negative sentiment, the stock market appears to be booming. On October 21, the Dow Jones and the S&P 500 hit all-time highs.

However, these indicators alone do not tell the whole story. Inflation can distort how we perceive market gains. While it may seem like investing in the stock market has record returns, those returns are more moderate once adjusted for inflation.

In short, inflation not only hurts consumers, but also investors – which includes most Americans. This hidden tax on savings and investment quietly eats away at real profits, leaving Americans with far less purchasing power than it appears on the surface.

To estimate how this would affect someone investing in the stock market in January 2021, compare the Dow Jones Industrial Average to its inflation-adjusted counterpart. Although nominal stock market gains in 2021 show growth of 39%, this growth shrinks to just 15% when adjusted for inflation.

Inflation, often overlooked in stock market discussions, has a tangible impact on investment returns. Investors who focus solely on nominal earnings without considering inflation can develop a false sense of optimism about their portfolio’s performance.

So how can inflation have such a noticeable effect?

In simple terms, as prices rise, even significant yields lose their purchasing power. It takes more money to buy the same goods and services, eroding the real value of one’s earnings. As everything gets more expensive, the higher earnings or return on investment don’t stretch as far, making it harder to keep up with the true cost of living.

For comparison, one can track average returns from 2016 to 2020. During this period, both the Dow and the inflation-adjusted Dow are much closer, suggesting that inflation has had less of an effect on the erosion of profits. Indeed, in spite of the shock of COVID-19The inflation-adjusted Dow is up about 65%, while the unadjusted Dow is up 81%.

Inflation is not just a consumer problem, it affects everyone from families trying to make ends meet to investors on Wall Street. The disconnect between nominal market gains and their inflation-adjusted counterparts helps explain why many Americans, despite an apparently booming stock market, express concern about the economy.

This growth illusion highlights the need for a stronger focus on controlling inflation. Reducing wasteful government spending and reducing inflation are essential not only to preserve the real value of investments, but also to ensure that economic prosperity is felt at all levels of society.